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April 11, 2022

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Matt Wood

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How to afford net-zero retrofit

With energy bills rising and our climate target deadlines looming, we need net-zero retrofit to mitigate runaway climate change and a devastating cost of living crisis. So, how can we afford it at the scale and speed we need?

One question we often face is, “but isn’t deep retrofit too expensive?” Our answer? We can’t afford *not* to do deep retrofit.

Yes, it’s expensive, especially currently as the supply chain is underdeveloped and underinvested. But the alternative is even more costly – piecemeal retrofit that will need to be updated 5, 10, 15 years down the line resulting in homes that continue to spew carbon emissions and cost the earth for tenants (literally and figuratively).

We also know however that, with little upfront capital and a lack of consistent funding, social housing providers struggle to afford whole house retrofit.

Housing providers are buying cheap boots

Jack Monroe recently reminded me of an anecdote from a Terry Pratchett book, while using it to illustrate the challenges of living in poverty. The character Sam Vimes buys cheap boots for £10, because he can’t afford £50 for good boots.

Take boots, for example. He earned $38 a month plus allowances. A really good pair of leather boots cost $50. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about $10.

…The thing was that good boots lasted for years and years. A man who could afford $50 had a pair of boots that'd still be keeping his feet dry in 10 years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet."

This is the challenge that social landlords currently face with asset management. They cannot afford to make the big changes needed, so instead make smaller upgrades that will cost more in the long-term.

It is not a cost-effective way to get to net zero.

Why single-measure retrofit is more expensive in the long-term

Currently, most social housing providers are only able to spend as little as possible in the short term to meet government targets and avoid resident complaints. The result? Each house will have multiple interventions, each causing disruption and additional cost. Some works will conflict with previous works. There’s understandably little consideration for how improvements might be sustainably funded.  

And when energy efficiency upgrades are planned, there is no performance monitoring. No performance monitoring means the tenant may not see the expected improvements. With works not guaranteed to perform and no clarity on who is responsible if things do go wrong, the housing provider bears the cost. It is not a cost-effective way to get to net zero.

And to pay for it, the housing provider must repeatedly apply for various government grants, with unachievable deadlines and ever-changing eligibility criteria. This stop-start funding doesn’t provide programme continuity or stability for the retrofit sector.

So, the question is, what’s the alternative?

When you procure an Energiesprong retrofit, you get a maintenance cost and system performance guarantee.

The Energiesprong approach

This is what Energiesprong is really about. Finding a way to finance and deliver net zero retrofits, at scale.

Mr Kazadi, a Nottingham City Homes tenant, says about his newly Energiesprong retrofitted property: "Everything is perfect. This was actually a great decision, a massive improvement. It is a good gift!"

First, we address the long-term financial case. We use 30 years because this is the period over which social housing providers set their planned maintenance schedules. We can’t just think about upfront cost, we have to think about servicing and cyclical replacement costs too.

When you procure an Energiesprong retrofit, you get a maintenance cost and system performance guarantee. This forces the solution provider to really think about the components they put in, incentivising long life and high-quality components - not just lowest upfront cost.

The system performance guarantee plus the ongoing monitoring means that you can eliminate damp and mould, which makes up about 20-30% of a housing provider’s responsive repairs costs according to our own analysis.

Removing gas means the resident no longer pays the gas standing charge, saving about £100 a year. It also means the landlord can stop doing gas safety checks which costs a similar amount.

The system performance guarantee, combined with a deep retrofit, renewable energy and removal of gas, means you can replace a large part of the resident’s gas bill with a comfort charge. This income goes to the housing provider to help pay for the retrofit.

Finally, excess PV generation can be exported to the grid to provide additional income. And if you have a battery installed, this can provide additional income through grid flexibility contracts.

These elements provide the basis for a viable 30-year financial case that can be scaled up and rolled out across the housing stock.

We know that currently prices are too high.

But the market isn’t there yet

However, we’re not at the point where this approach is viable.

First, we must reduce costs. We know that currently prices are too high. There are a couple of reasons for this:  

We are creating prototypes: The current projects are prototypes. The first solutions may not be quite right, which means higher costs to rectify, and cover risk, and this is a necessary learning process. But costs can be reduced as prototypes turn into products. Melius Homes has been developing its MMC advanced panelised system for deep retrofit over the past 3 years using continuous learning from the Energiesprong pilot projects with a cost reduction of circa 45%.

Industrialisation must be scaled: Costs for industrialised products will be lower than a labour-intensive traditional approach, but only at scale. Investment is needed to develop the digitalised and automated processes which reduce cost for manufactured solutions.  This investment will only come once there is volume and until then many solutions are only partly industrialised.

The sector has become more expensive: We are also working in an environment where all costs are going up due to Brexit, materials shortages, and now the Ukraine war. We have seen this across the board for retrofit projects.

Our Innovation Partnership is enabling phase-by-phase learning by doing, aiming for an economically viable net-zero product by the end of the process.

What are we doing to create change?

Our Innovation Partnership is pioneering a new approach to retrofit procurement, developed as part of the the Mayor of London's Retrofit Accelerator Homes programme alongside our partners Turner & Townsend.

We have structured a process which enables the phase-by-phase learning by doing. The partnership works through phases from prototyping to scale up, with each phase having higher numbers of homes, and a lower price target, aiming for an economically viable net-zero retrofit product by the end of the process.  

The structure encourages collaboration between supply chain partners and landlords within the partnership so the lessons can be shared and adopted, to help reduce costs more rapidly.

With eight social landlords engaged in the partnership, and volume building to thousands of homes over the next few years, and then a national framework, this is also helping to send the clear signal to the supply chain that there is demand, and they should invest in developing lower-cost processes and products which work at scale.

People in the country are about to face the highest rise in cost of living in a generation. The likelihood of us meeting our carbon targets is fast falling from our grasp. Let’s not kick these problems down the road - help us tackle this dual crisis immediately.

What can you do to help?

Supply chain: We need the supply chain to move beyond individual components towards integrated products and services with business models that evolve beyond sales to subscription or leasing. Consider how  retrofit can be more than the sum of its parts!

Embrace the opportunity to learn from the automotive and other industries, driving towards an attractive and financially viable offer. How can you prove your systems work when installed?

Policymakers: We need long-term reducing level innovation funding to give all parties certainty.  But we need more than just grant funding from government. We need them to change the policy environment to enable long-term business models and unlock financial investment. Programme funding to support whole house retrofit, consistency with VAT rates, low-cost finance and long-term legal targets. You can see more about this with our 5 asks for government.

Financiers: we need external finance. If suppliers can demonstrate their solutions work in practice, it can unlock income through the comfort plan or maintenance contracts, giving financiers the security to be able to invest in retrofit. This reduces the burden on the housing provider to finance the whole cost.

Social housing providers: Start demanding and measuring real-world performance. EPC ratings are not proof of carbon savings. Use something like Smart HTC to measure the property’s performance before and after retrofit. If you’re not measuring performance, how do you know you’re getting what you paid for?  

Collectively demanding more as a clients will create the necessary shift in the construction sector, which let’s face it, is the only sector where you’d buy a new product and expect to fix its problems yourself!

Also, you need to be planning for scale. We don’t have time to retrofit 10 homes and then stop and have a think. We need a plan to get to 1,000s of retrofits per year and beyond to meet our targets.

Get in touch

If you’re a social housing provider, a supplier or a finance provider, please get in touch to talk to us about how you can get involved and what you can do to change the status quo.

People in the country are about to face the highest rise in cost of living in a generation. The likelihood of us meeting our carbon targets is fast falling from our grasp. Let’s not kick these problems down the road - help us tackle this dual crisis immediately.

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